China's uncertainty dampens fund flows

TNN|

Apr 29, 2007, 12.00 AM IST

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MUMBAI: Uncertainty about China's response to economic growth that clearly exceeds official targets may have dampened flows into emerging markets funds during the last week of April, according to Emerging Markets Portfolio Funds Research (EPFR).

"It is interesting to note that so far slowing US growth hasn't benefited EMEA funds at the expense of Latam funds at least in terms of flows which is something you'd expect given Latin America's higher correlation to US and the help accelerating growth in the Eurozone is giving EMEA markets," EPFR managing director Brad Durham said in the note.

"But our country flow data does show steady selling of Mexico, Brazil and the region as a whole in recent months while there's been net buying of key Emerging Europe markets. So it looks like sources of capital favor Latin America over EMEA markets while the opposite is true of fund managers." he added.

Doubts about the outlook for growth in the US and China, allied to the impending release of a raft of key data and a Bank of Japan meeting on interest rates, accelerated outflows from Japan Equity Funds. These funds have been hit with net redemptions seven of the past eight weeks and are once again in negative territory year to date.

During the same period last year, net inflows totalled $4.65 bn. Money returned to US Equity Funds during the week as the benchmark Dow Jones index posted a series of new record highs on the back of a better than expected first quarter earnings season.

And, after three weeks of solid gains, investors pulled significant amounts of money out of Western European Equity Funds. The $3.77 billion that flowed into US equity funds during the week ending April 25 pulled these funds back into positive territory year-to-date. Net inflows currently total $830.5 mn versus $2.76 billion for the comparable period last year.

Small and Large Cap Blend exchange traded funds — passively managed funds which mix growth and value investment styles — accounted for the lion's share of the fresh money that came in during the week. This is in keeping with recent trends, which has seen the earlier focus on funds managed for value shift towards ones that have some measure of exposure to the riskier, more rewarding growth stocks.

Meanwhile Balanced Funds, which invest in both stocks and bonds, extended their winning streak. Viewed as one of the most conservative choices among the various sub-group of US Equity Funds, they have attracted over $3 billion so far this year compared with net outflows of $4.1 billion during 2006.

Among the other fund groups geared primarily to developed markets, Global Equity Funds enjoyed another solid week, taking in $1.22 billion. That is the fifth straight week this fund group has absorbed over $1 billion and year-to-date inflows are now at 71% of last year's record-setting total. But Western European Equity Funds did not fare so well.

In the case of the Western European funds, investors decided to lock in profits after this fund group has put in a 9% performance gain since March 22. The perception that mergers and acquisitions activity rather than fundamentals were driving recent gains in major European equity markets triggered some of the $1.01 billion worth of redemptions from these funds, as did the growing concern about Spain's property bubble.